Even if there is a blow away jobs number Friday, many economists expect the report will show fewer private sector jobs were created in May than in April.
Economists forecast about 520,000 non farm payrolls, but expect only about 190,000 of those will come from the private sector, compared to the 231,000 private sector jobs added in April. Unemployment rate is expected to dip to 9.8 percent, from 9.9. percent.
As Friday approached, some economists raised the number of census workers in their forecasts. On Thursday, Goldman Sachs economists increased their forecast for census workers by 100,000 to 450,000, and estimated private sector payrolls at 150,000.
Credit Suisse also expects to see a high number of census workers. "Our headline number is 540,000 -- 420,000 of which we think will come from the census, " said Credit Suisse economist Jonathan Basile. "Outside of that, if you look at private payrolls, it's a little less than what we've been seeing but shows some sustained gains."
Thursday's weekly jobless claims fell by 10,000 to 453,000, short of expectations. Basile said the claims data has "stalled" and some other employment indicators, like ADP's report of 55,000 May private sector jobs, were also soft.
"You have all those factors that suggest maybe you're not going to see the same kind of gains we've seen," he said. "Any time the second derivative goes a little negative in an indicator, it gets people a little concerned. Any kind of bigger drop in the second derivative, for instance, if the private number is 100,000 less than last month, it could raise some eyebrows. But we're still on the path of sustained gains in jobs."
Basile also watches the Monster employment index and Help Wanted Online Ads, which both showed a positive though slower growth trend for jobs in May. The Monster index rose 0.7 percent in May over April, after a 5.3 percent advance in April over March. May showed the eighth gain in the last 10 months, and on a seasonally adjusted basis, the index was up 13.7 percent year-over-year.
"Just like you don't go down at the same rate, you don't recover at the same rate and there may be months where you get a little less than you thought but when you put it in the same stew, you've got another month of jobs gains," he said.
Economists expect the contribution of payrolls from the government's temporary hiring of census workers to have peaked in May. They expect by July or August, the elimination of those jobs will turn into a negative.
Traders expect the market to rally only if the employment report shows a much stronger than expected improvement in private sector jobs. The S&P 500 has been hovering near its 200-day moving average, and on Thursday, it closed right on it. A close above that level would have been seen as a positive for stock.
"If this employment report is much worse than people expect, you're going to get a real down day because that would really reinforce the idea of a double dip for the U.S. economy," said Richard Bernstein of Richard Bernstein Capital Management.
The stock market finished slightly higher Thursday, after drifting lower during the trading day. Stocks followed the euro, which headed to its lows of the day after the European markets close. The Dow was up 5 at 10,255, while the S&P 500 was up 4 at 1102, in a key technical zone.
The eurodid an about face during Thursday and ended the New York session at $1.2182, close to its four-year low.
Traders pointed to a sharp widening of spreads of Spanish and Italian bonds, compared to the German bund. They also say Hungary was a worry, after a report that quoted Laos Kosa, managing vice president of Hungary's ruling Fidesz party as saying Hungary could be facing a situation similar to the Greek fiscal crisis.
U.S. Treasury prices slipped Thursday, sending yields higher. The 10-year finished at 3.37 percent, up from 3.35 percent Wednesday.
"There's kind of contradictory signals," said Greg Peters, head of global credit research at Morgan Stanley. "A lot of people are looking at the fact that Spain spreads are back to where they were before the ($1 trillion rescue) package..I think that's somewhat overplayed in a way because I think it's more a function of the bunds rallying than anything else. Our trading side is less concerned about it."
But Spain has to roll over a pile of debt this summer. "There's a slew of maturities coming due in July, and that's the test," he said.
"I personally feel better about things. I think a lot of the risk is more in the prices today than what it actually is.. You're seeing correlations start to break down," he said. "The euro versus the risk markets is a big one."
Basile said so far the impact of the European debt crisis is not likely to be impacting the U.S. economy, though it could if there were a worsening in financial conditions. "It would work its way through that way. That would take some time and right now there's cyclical forces of job growth just starting to take hold and it's difficult to turn that ship around once it gets going," he said.
"If it happened in the second half of '09, I think companies would have put off some of their decisions to hire back, but because it's happening when it is you have a strengthening North American picture, and you also have a strong Asian and Latin American picture. To be honest, trade figures didn't get any benefit from U.S. exports to Europe in the last year or so," said Basile.
Treasury Secretary Timothy Geithner also said Thursday he does not see an impact on the U.S. economy from the European situation. He told CNBC's Steve Liesman, in an interview from Alaska, that there's a "moderate, but pretty solid" recovery in place in the U.S. and that European officials are making the right moves. Geithner was en route to Korea for a G-20 finance ministers meeting.
Geithner also tipped during the interview that the Administration will move on reforming Fannie Mae and Freddie Mac and the broader housing finance system, just as soon as the financial reform bill is approved.
Crude got a boost in late trading after a news report said that the federal moratorium on new offshore drilling permits would now apply to shallow water wells. The extension of the ban on deep water drilling was later denied by the Interior Department.
Oil rose 2.4 percent to $74.61 per barrel, helped also by an inventory report showing crude and gasoline stocks fell more than expected.
What to Watch
The May employment report is released at 8:30 a.m.
At 9 a.m., British Petroleum holds an investor meeting.
Wal-Mart holds its annual shareholders meeting in Fayetteville, Arkansas.
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